According to this indicator, sentiment concerning IPOs on the German equities market is increasingly positive. Falling volatility on equity markets combined with increasing share prices indicates heightened issuing activity. Parallel to this, market participants expectations concerning IPOs have continued to improve. Market participants perception that the difference between the issuing price and first listing price, the underpricing, recently decreased, is having a dampening effect. All in all, the environment for IPOs appears to be steadily improving.
The IPO indicator, which is published each quarter, is an important barometer for companies seeking capital that aim to go public and that are looking for the right moment to enter the capital market. The indicator is compiled from surveys of market participants and calculations by the Technical University in Munich using Deutsche Brse trading data.
The successful first IPO quarter shows that equity capital is again available on the exchange. The indicators now available reliably show that the trend will continue in the coming months and that the issuing backlog will ease, says Frank Gerstenschlger, member of the Executive Board of Deutsche Brse. In Q1 2010, Deutsche Brse placed first among European listing venues with a total issue volume of US$ 2.24 billion. Studies regularly show that an IPO boosts companies’ domestic and foreign sales, and encourages broader diversification and higher spending on research and development.
Deutsche Brse developed the Deutsche Brse IPO Sentiment Indicator together with Professor Christoph Kaserer from the Center for Entrepreneurial and Financial Studies (CEFS) at the Technical University in Munich as a mood barometer for the primary market. The indicator is based on conclusions drawn from empirical capital market research. It combines that with past experience using behavioral finance theory. It is calculated at the end of every quarter, and since the beginning of this year has comprised four components: under-pricing sentiment (realized difference between the issuing price and the first listing price), DAX share price performance, volatility and IPO climate.
This has enabled forecast quality to be further improved. The indicator was calculated for the first time in March 2005.
The underpricing sentiment shows how successful past IPOs were in the eyes of market participants. To do so, the realized difference between the issuing price and the first listing price is calculated. Companies appear to think more seriously about going public after a phase of severe underpricing. Higher market prices as a component of underpricing make an IPO more attractive because they reduce the cost of capital. Thus one can conclude that IPO activity is linked to the level of underpricing with a certain time delay.Several empirical findings actually point to such a relationship.
The IPO climate is determined from a survey of a panel of consortium banks, active investors and issuers. Each participant is asked five questions. The first two deal with the IPO markets attractiveness. They are related and thus counted together. The idea behind this is that an evaluation of the market s attractiveness should be harmonized with the participants actual actions. The greater the contextual consistency of the two answers, the more reliable the rating of the answers. Questions three and four inquire about estimates of the current and future equity market valuation. The answer to the last question gives an estimate of future IPO activity on the primary market. The answers are given using a scale from 1 to 5, which results in a total value for the IPO climate of between 3 and 60, providing an indication of the highest possible value. The IPO climate improved quarter-on-quarter for the sixth time in a row, from 31.68 to 33.42 points.
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